The Liquidity Uncertainty Premium Puzzle

Author:

Flora Maria1,Gianstefani Ilaria2,Renò Roberto3ORCID

Affiliation:

1. Capital Fund Management Paris France

2. Financial Stability Department De Nederlandsche Bank Amsterdam the Netherlands

3. ESSEC Business School Cergy France

Abstract

ABSTRACTThe puzzling negative relation between liquidity uncertainty and asset returns, originally put forward by Chordia, Subrahmanyam, and Anshuman (2001) and confirmed by the subsequent empirical literature up to date, is neither robust to the aggregation period, nor to the observation frequency used to compute the volatility of trading volume. We demonstrate that their procedure involves an estimation bias due to the persistence and skewness of volumes. When using an alternative approach based on high‐frequency data to measure liquidity uncertainty, the relationship turns out to be positive. However, portfolio strategies based on liquidity uncertainty do not appear to be profitable.

Publisher

Wiley

Reference31 articles.

1. A Simple Estimation of Bid-Ask Spreads from Daily Close, High, and Low Prices

2. Asset pricing with liquidity risk

3. Akbas F. W. J.Armstrong andR.Petkova.2011.Idiosyncratic volatility of liquidity and expected stock returnsWorking Paper.

4. Illiquidity and stock returns: cross-section and time-series effects

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